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Chapter 12: Q1BE (page 638)

Taylor Swift Corporation purchases a patent from Salmon Company on January 1, 2017, for $54,000. The patent has a remaining legal life of 16 years. Taylor Swift feels the patent will be useful for 10 years. Prepare Taylor Swift鈥檚 journal entries to record the purchase of the patent and 2017 amortization.

Short Answer

Expert verified

To record the purchase of the patent, Patents are debited, and cash is credited by $54,000.

To record the 2017 amortization, Amortization expense is debited, and patents are credited by $5,400.

Step by step solution

01

Calculation

AmortizationExpensefordefendingthepatentsuitin2019=(CarryingvalueofpatentrecordedonJan1,2018+priceofdefendingsuit)/remainingusefullifeCarryingvalueofpatent=54,000-(2脳5,400)=43,200Remainingusefullife=10years-2yearsofamortization

02

Journal Entries

Date

Particulars

JF

Debit

Credit

Patents

$54,000

Cash

$54,000

(Being patents purchased by Salmon company)

Amortization expense

$5,400

Patents

$5,400

(Being yearly amortization recorded)

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Most popular questions from this chapter

The following is selected information for Alatorre Company.

1. Alatorre purchased a patent from Vania Co. for \(1,000,000 on January 1, 2015. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2025. During 2017, Alatorre determined that the economic benefits of the patent would not last longer than 6 years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2017?

2. Alatorre bought a franchise from Alexander Co. on January 1, 2016, for \)400,000. The carrying amount of the franchise on Alexander鈥檚 books on January 1, 2016, was \(500,000. The franchise agreement had an estimated useful life of 30 years. Because Alatorre must enter a competitive bidding at the end of 2018, it is unlikely that the franchise will be retained beyond 2025. What amount should be amortized for the year ended December 31, 2017?

3. On January 1, 2017, Alatorre incurred organization costs of \)275,000. What amount of organization expense should be reported in 2017?

4. Alatorre purchased the license for distribution of a popular consumer product on January 1, 2017, for $150,000. It is expected that this product will generate cash flows for an indefinite period of time. The license has an initial term of 5 years but by paying a nominal fee, Alatorre can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended December 31, 2017?

Instructions:

Answer the questions asked about each of the factual situations.

Raleigh Corp. has an investment with a carrying value (equity method) on its books of \(170,000 representing a 30% interest in Borg Company, which suffered a \)620,000 loss this year. How should Raleigh Corp. handle its proportionate share of Borg鈥檚 loss?

Question: (Accounting for Patents) On June 30, 2017, your client, Ferry Company, was granted two patents covering plastic cartons that it had been producing and marketing profitably for the past 3 years. One patent covers the manufacturing process, and the other covers the related products.

Ferry executives tell you that these patents represent the most significant breakthrough in the industry in the past 30 years. The products have been marketed under the registered trademarks Evertight, Duratainer, and Sealrite. Licenses under the patents have already been granted by your client to other manufacturers in the United States and abroad, and are producing substantial royalties.

On July 1, Ferry commenced patent infringement actions against several companies whose names you recognize as those of substantial and prominent competitors. Ferry鈥檚 management is optimistic that these suits will result in a permanent injunction against the manufacture and sale of the infringing products as well as collection of damages for loss of profits caused by the alleged infringement.

The financial vice president has suggested that the patents be recorded at the discounted value of expected net royalty receipts.

Instructions

  1. What is the meaning of 鈥渄iscounted value of expected net receipts鈥�? Explain.
  2. How would such a value be calculated for net royalty receipts?
  3. What basis of valuation for Ferry鈥檚 patents would be generally accepted in accounting? Give supporting reasons for this basis.
  4. Assuming no practical problems of implementation and ignoring generally accepted accounting principles, what is the preferable basis of valuation for patents? Explain.
  5. What would be the preferable theoretical basis of amortization? Explain.
  6. What recognition, if any, should be made of the infringement litigation in the financial statements for the year ending September 30, 2017? Discuss.

Question: (Goodwill, Impairment) On July 31, 2017, Mexico Company paid \(3,000,000 to acquire all of the common stock of Conchita Incorporated, which became a division of Mexico. Conchita reported the following balance sheet at the time of the acquisition.

Current assets

\) 800,000

Current liabilities

\( 600,000

Noncurrent assets

2,700,000

Long-term liabilities

500,000

Total assets

\)3,500,000

Stockholders鈥� equity

2,400,000

Total liabilities and stockholders鈥� equity

\(3,500,000

It was determined at the date of the purchase that the fair value of the identifiable net assets of Conchita was \)2,750,000. Over the next 6 months of operations, the newly purchased division experienced operating losses. In addition, it now appears that it will generate substantial losses for the foreseeable future. At December 31, 2017, Conchita reports the following balance sheet information.

Current assets

\( 450,000

Noncurrent assets (including goodwill recognized in purchase)

2,400,000

Current liabilities

(700,000)

Long-term liabilities

(500,000)

Net assets

\)1,650,000

It is determined that the fair value of the Conchita Division is \(1,850,000. The recorded amount for Conchita鈥檚 net assets (excluding goodwill) is the same as fair value, except for property, plant, and equipment, which has a fair value \)150,000 above the carrying value.

Instructions

  1. Compute the amount of goodwill recognized, if any, on July 31, 2017.
  2. Determine the impairment loss, if any, to be recorded on December 31, 2017.
  3. Assume that fair value of the Conchita Division is \(1,600,000 instead of \)1,850,000. Determine the impairment loss, if any, to be recorded on December 31, 2017.

Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be reported in the income statement.

Question: (Goodwill Impairment) Presented below is net asset information related to the Carlos Division of Santana, Inc.


CARLOS DIVISION

NET ASSETS

AS OF DECEMBER 31, 2017

(IN MILLIONS)

Cash

\( 50

Accounts receivable

200

Property, plant, and equipment (net)

2,600

Goodwill

200

Less: Notes payable

(2,700)

Net assets

\) 350

The purpose of the Carlos Division is to develop a nuclear-powered aircraft. If successful, traveling delays associated with refueling could be substantially reduced. Many other benefits would also occur. To date, management has not had much success and is deciding whether a write-down at this time is appropriate. Management estimated its future net cash flows from the project to be \(400 million. Management has also received an offer to purchase the division for \)335 million. All identifiable assets鈥� and liabilities鈥� book and fair value amounts are the same.

Instructions

a. Prepare the journal entry (if any) to record the impairment at December 31, 2017.

b. At December 31, 2018, it is estimated that the division鈥檚 fair value increased to $345 million. Prepare the journal entry (if any) to record this increase in fair value.

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